Losing Control: Emerging Threats to Western Prosperity

Stephen D. King suggests the days of the US dollar's supremacy may be numbered in Hong Kong on June 7, 2010. (4 min., 3 sec.)

HONG KONG, June 7,
2010 - The dollar could lose its reserve currency
status to the renminbi, according to Stephen D. King, HSBC's
group chief economist and global head of economics. He told the Asia Society
Hong Kong Center,
"The dollar's reserve
currency status is under threat in the years ahead. What will replace it? In
the very, very, very long term, it may be the renminbi, simply because it is
the biggest and most successful economy in the world that tends to be the
issuer of the world's currency."

King continued, "But I have to say, it's a long way away. I'm not
suggesting this year or the year after. It is also worth stressing the renminbi
could replace the dollar only if the dollar loses its way beforehand. Reserve
currencies are not displaced, simply destroyed. We are nowhere near the point
where the dollar will fall away, but it's a big long-term risk in the years
ahead."

King
noted the ongoing decline in Western prosperity. "If you look at current trends, it's clear that the West's role in the
world economy is shrinking and shrinking rapidly. Asia, Latin American, even
sub-Saharan Africa are going to be more
important in the years ahead."

He observed, "It's likely that China will be the biggest economy
in the world in 20 or 30 years' time. It may not be the richest but it will be
the largest." As the economic giants of Asia
and elsewhere have awakened, Western leaders have increasingly struggled to
maintain economic stability.

"For the West, the world is changing in an awkward way. Economic power
will diminish, and this gives the West two choices. The sensible choice has to
be to grow old gracefully and accept that the West's place in the economic sun
is fading, and that the baton of economic growth should be passed on to other
nations. The other alternative is to choose to disengage and adopt much more
isolationist policies and go into a more protectionist mode to extract itself
from China
and rest of the world."

King warned Western economies against shutting themselves off from the
world. "My prediction is, if the West does this, it ends up with much more
expensive imports, much higher costs of capital, higher unemployment, and much
higher levels of economic and social stress."

He noted the Western world, due to
high debt levels, is likely to be faced with a multi-year period of economic
austerity. "The US and Europe are about to go down the path that Japan has already
explored—one of very weak growth constrained by debt. It is a kind of poor
longer-term outlook, while at the same time the emerging nations will do quite
a lot better."

He concluded that the Greek
debt crisis had forced the world to face up to a new reality. "That is, Western
governments with lots of debt could contemplate default. The possibility of
this happening was completely absent until now. Up to now government bonds were
seen as safe. The question now is, are they really safe? It creates great
uncertainty around the entire financial system."

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